Consumer confidence a lagging indicator

Investors’ apparent shock in reaction to today’s report of plunging consumer confidence has all the authenticity of Captain Renault’s classic comment in \’Casablanca\’ that he was “shocked” to find that gambling is going on in the casino.

That’s because consumer confidence is a lagging indicator; it tends to fall in the wake of stock market declines. The cutoff date for the survey on which the Conference Board based its latest calculations was Aug. 18, at which point the Dow Jones Industrial Average over the preceding month had declined by nearly 1,400 points, and was just coming off a period of extraordinary volatility. No wonder consumers weren’t very confident.

Perhaps the best factoid to illustrate that consumer confidence data should be viewed in a contrarian way: The highest level to which the Conference Board’s consumer confidence index has risen in the last 20 years came in January 2000, just weeks prior to the popping of the Internet bubble.

This contrarian perspective is confirmed by a 2002 study by Kenneth Fisher of Fisher Investments and Meir Statman, a finance professor at Santa Clara University. They found that “consumer confidence declines when stock prices decline but investors need not fear that declines in consumer confidence would be followed by low stocks returns… Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.”

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